Entitlement Confusion and Loan Amounts

By: Grant Moon 03/11/15 12:04 pm

The VA home loan guarantee is a promise the lender will be compensated 25 percent on the loss of a defaulted loan as long as the VA can verify the lender approved the loan using standard VA guidelines. Although this situation is extremely rate, it happens. That’s why one of the very first things lenders do is request the veteran’s certificate of eligibility. Veterans can request this certificate on their own but approved VA lenders have access to an automated system that can retrieve a copy of the certificate, much faster than the veteran’s efforts, to document eligibility as well as how much entitlement is available.
Over the years, the entitlement amount has changed. The original entitlement program set the guaranty at 50 percent of the loan amount but not to exceed $2,000. That was back in 1944. Over the years, that entitlement amount has grown as home prices overall have increased over time.
The certificate today will show how much entitlement is available. For first time home buyers, that amount is $36,000. Who buys a home these days for $36,000? Very few, yet as the VA guarantees 25 percent of the sales price and the entitlement is $36,000, the maximum loan amount is 4 X $36,000 = $144,000. But that’s where it gets confusing to some. If the maximum VA loan limit is $417,000, how can lenders advertise VA loans higher than the $144,000 sales price?
While this formula still works in many circumstances, the Veteran’s Benefits Improvement Act of 2004 was signed into law increasing the maximum VA loan guaranty amount for loans over $144,000 to 25 percent of the annual conforming loan limit set by Fannie Mae and Freddie Mac. Additionally, in areas deemed “high cost” the maximum VA loan can be as high as $625,500. While the entitlement listed on the certificate of occupancy will say, “$36,000” the actual loan guarantee can be higher.

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